Warren Packard: Unique Approaches to Compensation and Valuation

One of the first things we had to do was compensate people for the work, even when we were working part time. And that brought up cash versus equity. And all of us at first were on equity. But what we did was something that I'll throw out to you as a proposal because I'm not sure how often this has been done, but we created an economy in our company where cash and equity were fungible. And basically, when we raised seed money for our company, we priced the round and we basically said, it's whatever, $0.10 per share for this. And when individuals invested in our company, they invested at 10 cents per share. And when somebody did work for us, we simply could convert that, either a dollar amount or a share amount. And it just didn't matter to us because some of the folks that were working part time for our company needed cash, and some of the folks that were working for a company wanted equity. And we wanted to accommodate both without creating attention. So we created this economy within the company. It forced us to price our seed round, and it's very popular these days to do a convertible, and I won't get into all the details, but to basically bring money in that would convert into a round that would be priced later. And we decided not to do that so we could create this economy. And I'll just throw out that. This experiment, I believe, worked very well because those of us who wanted equity, we were all in for equity. And those who wanted cash, no problem. And you could take out cash and get equity. You could put in cash. Wait, take out cash? Well, you know what I mean. Anyway, you could go back and forth, but this was a very interesting decision that we made for fundraising number two from Thuuz valuation. How do you set a valuation for your company when there's not much? There's. And of course that's an art rather than a science. But the point that I'm going to just push out here in the next minute is it's very attractive to have a high valuation and value a company at something that you can go and boast about, or at least internally feel like, hey, we got this high valuation, we actually set out to get the lowest valuation we could. That's not exactly correct because we didn't want to just give away the company, but we, and this is going to really sound weird, perhaps we really want to make our investors money. And as a consequence, we don't want to raise money at a super high valuation. We want to make sure that the valuation that we set on our company is low enough. So that we give our investors the maximum chance of making money in the venture, which, of course, we want to give ourselves the maximum chance of making money in the venture. And if you want to raise a subsequent round of financing and your prior round is priced too high, it becomes more difficult. So we strove to raise as little money as we could at as low a valuation as we could. And we're just now going out for our first institutional round of financing. And it seems to be playing out well because we're not getting pushback in terms of where our prior round valuation was. So something to think about. You can brag a lot about high valuations, but you want the right valuation. You got to balance dilution. You've got to balance getting your next round. And finally, well, I guess the final point I've already brought up is, do you care or not care about your investors? Do you care or not care about your venture capitalists? And this is, I guess it's an obvious one coming from somebody who was formerly a venture capitalist, but I have seen on many occasions an entrepreneur very, very thankful for the money that comes in from their venture capital backers, but then forgetting the fact that the venture capitalist has their own goals and desires in terms of making money and making money fast. And it's something to think about. They're a stakeholder. Your employees are stakeholders, your customers, your partners, they're all stakeholders. You've got to balance all these things in incredible uncertainty, and it's very difficult to do. But I guess I'll implore you that as you build your business forward, don't lose sight of any of these stakeholders and take on the challenge of balancing all these different uncertainties. There are no answers, but ultimately, you'll make really good decisions because you'll be able to justify them based on how your decisions impact all the different stakeholders. Not easy, but I think a lot of you are going into entrepreneurship and you'll realize that in the final analysis, you are living in uncertainty and you're just going to have to deal with it.